Is my foreign-owned company exempt from tax breaks under the new tax law?

by James G. McGrory, CPA, and Stephanie K. Otake, CPA | Feb 26, 2018
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I work for a company that is a wholly owned U.S. subsidiary of a foreign company. With the latest tax reform, is our foreign-owned company exempt from the tax breaks?

Assuming your company is organized as a corporation, listed below are some of the main tax provisions that would affect the U.S company:

  • The corporate income tax rate has decreased from 35 percent to 21 percent effective, as of January 1, 2018;
  • The corporate alternative minimum tax (AMT) has been repealed;
  • Bonus depreciation has increased from 50 percent to 100 percent for qualified property (including both new and used property) placed into service between September 28, 2017, and before the year 2023.  The 100 percent depreciation deduction is phased down 20 percent per year after 2022; 
  • The Section 179 deduction has been increased from $500,000 to $1 million. and the phase-out threshold for the level of assets placed in service has been increased to $2.5 million;
  • Small business accounting method exceptions have been expanded, so companies with average annual gross receipts under $25 million can:  1) Qualify to use the cash method of accounting, 2) Are not required to follow the uniform inventory capitalization (UNICAP) requirements of Section 263A, and 3) Can treat inventories as non-incidental materials and supplies if this conforms to financial statement treatment of inventories;
  • The Section 199 deduction for domestic production activities has been repealed for tax years beginning after December 31, 2017;
  • There are limitations on the use of net operating losses (NOLs) for amounts arising in taxable years beginning after December 31, 2017: 
    • Carryovers can be used to offset 80 percent of taxable income, and
    • Carrybacks are eliminated, but carryforwards have an unlimited life; and

A new limitation on the interest expense deduction for non-small businesses with average annual gross receipts over $25 million limitations under Section 163(j).

These are only some of the tax reform provisions affecting U.S corporations. Without more information regarding the size and structure of your company, it is difficult to say which of the various new international provisions will affect your company. Some of these include the Base Erosion Anti-Abuse Tax (BEAT), the Foreign Derived Intangible Income (FDII) Deduction, the Global Intangible Low-Taxed Income (GILTI) provisions of Section 951A, and the one-time tax on previously unrepatriated earnings under Section 965.

There remain plenty of tax planning opportunities for your company under the tax reform provisions. They should be discussed with a CPA who is familiar with your company’s structure and operations.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: James G. McGrory, CPA, and Stephanie K. Otake, CPA, are with Drucker & Scaccetti in Philadelphia.

Disclaimer
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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